Humana plunges on proposed Medicare cuts

Universal American also hit; eHealth falls for second straight session

LOS ANGELES (MarketWatch) — Shares of Humana Inc. took a dive Tuesday as the health insurer absorbed the blows of a proposed cut in Medicare Advantage reimbursement rates, a prospect that made most other managed-care providers shudder in trading.

Humana
HUM, -0.88%
tumbled more than 8% at one point, but pared losses in recent trades. Shares were down $6.13 to $71.86 in recent action.

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The 2010 health law has resulted in lesser-than-expected numbers of lower-income children signing up for new plans. Photo: Getty Images.

On Friday, the Centers for Medicare and Medicaid issued a news release stating plans that Humana said would result in reimbursement rates that were worse than expected for the insurer, which relies on Medicare Advantage business for nearly two-thirds of its revenue.

A comment period on the proposed cuts will last until March 1, and a final decision is due to come April 1.

Humana indicated in a Securities and Exchange Commission filing on Tuesday that its recent assessment of CMS rate changes — part of its fourth-quarter and year-end results issued on Feb. 4 — indicated that Medicare Advantage rate payments would be “flat to slightly down.”

“The company believes the preliminary base rates included in the CMS notice would result in a mid-single-digit decline in its benchmark payment rates,” the company said in its filing. “Therefore, Humana is closely analyzing all operational avenues available to address those preliminary rates and the related impact upon the company’s ability to grow both its Medicare membership and its earnings for 2014.”

Humana tumbles as much as 8% on proposed Medicare cuts.

Another big player in Medicare Advantage, Universal American Corp.
UAM, +1.31%
, plunged by more than 6% on the news. Universal had three-fourths of its revenue coming from the government program during the first nine months of the 2013 fiscal year. Full-year results are due out this week.

Analyst Matthew Borsch of Goldman Sachs said he would keep his sell rating on both Humana and Universal. In a morning note to clients, he said further declines in Medicare Advantage earnings are on the horizon.

“We believe downside to [Medicare Advantage] earnings for this year is modest. However, we think [price-to-earnings] multiples will be negatively impacted by increased visibility on the risks to 2014-2015,” Borsch said. “Unless mitigated by new regulatory and/or legislative initiatives, we believe the pending combination of health reform-driven reimbursement changes are likely to drive a decline in [Medicare Advantage] earnings by 2014-2015 with disparate impacts across the group.”

The news cast a pall among other health insurers, but none was harder hit than eHealth Inc.
EHTH, +4.97%
, which fell another 16% to $16.47 after losing more than a fifth of its value on Friday in the wake of its earnings report.

EHealth plunged Friday after missing earnings expectations and a lowered view for 2013, but analysts were concerned about the online insurance broker’s ability to survive while state health insurance exchanges were being set up. The prospect of lower Medicare rates is likely to cut into EHealth’s ability to compete even further.

Industry bellwether UnitedHealth Group Inc.
UNH, +0.70%
fell a bit of the impact, losing more than 2% to $56.02 while Aetna Inc.
AET, -1.03%
, Cigna Corp.
CI, +0.11%
and HealthNet Inc.
HNT, +0.57%
all lost more than a percentage point.

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